The demand for voice mail is Q = 1,000 - 150P + 20I.Assume that per capita disposable income I is $900.At a price P of $40, the income elasticity of demand is
A)2.
B)4.
C)1.0.
D)20.
E)1.38.

Question

Quizplus · Accepted Answer

First, we can calculate the quantity demanded at the given price and income level:

Q = 1,000 - 150P + 20I 
Q = 1,000 - 150(40) + 20(900) 
Q = 7,000

Next, we can calculate the income elasticity of demand at this point:

E(subscript)I(subscript) = (% change in quantity demanded) / (% change in income) * (income / quantity) 
E(subscript)I(subscript) = [(20 / 900) / (7,000 / 40)] 
E(subscript)I(subscript) = 1.38

Therefore, the income elasticity of demand at a price of $40 and per capita disposable income of $900 is 1.38, which is closest to choice (E).

The Demand for Voice Mail Is Q = 1,000 -